Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. As a small-cap bank with a market capitalisation of US$4.97b, Sterling Bancorp’s (NYSE:STL) profit and value are directly affected by economic growth. This is because borrowers’ demand for, and ability to repay, their loans depend on the stability of their salaries and interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting Sterling Bancorp’s bottom line. Today I will take you through some bad debt and liability measures to analyse the level of risky assets held by the bank. Looking through a risk-lens is a useful way to assess the attractiveness of Sterling Bancorp’s a stock investment.
Does Sterling Bancorp Understand Its Own Risks?
The ability for Sterling Bancorp to forecast and provision for its bad loans accurately serves as an indication for the bank’s understanding of its own level of risk. The bank has poorly anticipated the factors contributing to higher bad loan levels if it writes off more than 100% of the bad debt it provisioned for. This begs the question – does Sterling Bancorp understand the risks it has taken on? Given Sterling Bancorp’s bad loan to bad debt ratio is 45.05%, the bank has extremely under-provisioned by -54.95% which well below the sensible margin of error. This may be due to a one-off bad debt occurence or a constant underestimation of the factors contributing to its bad loan levels.
How Much Risk Is Too Much?Sterling Bancorp’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. Total loans should generally be made up of less than 3% of loans that are considered unrecoverable, also known as bad debt. When these loans are not repaid, they are written off as expenses which comes out directly from Sterling Bancorp’s profit. A ratio of 0.92% indicates the bank faces relatively low chance of default and exhibits strong bad debt management.
Is There Enough Safe Form Of Borrowing?Sterling Bancorp profits from lending out its various forms of borrowings and charging interest rates. Deposits from customers tend to carry the lowest risk due to the relatively stable interest rate and amount available. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since Sterling Bancorp’s total deposit to total liabilities is within the sensible margin at 77.34% compared to other banks’ level of 50%, it shows a prudent level of the bank’s safer form of borrowing and an appropriate level of risk.
How will STL’s recent acquisition impact the business going forward? Should you be concerned about the future of STL and the sustainability of its financial health? I’ve bookmarked STL’s company page on Simply Wall St to stay informed with changes in outlook and valuation. This is also the source of data for this article. The three main sections I’d recommend you check out are:
- Future Outlook: What are well-informed industry analysts predicting for STL’s future growth? Take a look at our free research report of analyst consensus for STL’s outlook.
- Valuation: What is STL worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether STL is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.